MiFID II, which comes into effect from 3 January 2018 covers a lot of ground and will require many firms to make changes to advice processes. Suitability reports are one important aspect that many firms will have to reconsider under MiFID II.

ATEB’s intelligent Suitability software is designed to help firms deliver effective suitability reports with minimum effort, enabling both the initial and ongoing reporting required under MiFID II.

Timing of suitability reports

Under MiFID II, a suitability report will have to be issued ‘before the conclusion of any contract’ recommended in it. There is some debate to be had around when a contract is concluded but we believe this simply means pre-sale – or that, in practice, firms should consider that to be a safe way to comply with the rule. We take the view that providing the report to clients before they make a decision on how to proceed has always been good practice and places the client in the best position to make an informed decision.

Content of suitability reports

Suitability reports must specify the advice given and how that advice meets the preferences, objectives and other characteristics of the client. COBS 9, the current primary source of rules and guidance on suitability will remain in place after 3 January 2018, at least for while but there is a whole new chapter, COBS 9A that will also apply to most firms and contains a few new requirements.

Firms must inform clients or potential clients, clearly and simply, that the reason for assessing suitability is to enable the firm to act in the client’s best interest.

When recommending a ‘bundled package’ of products, firms need to ensure that the overall package is suitable. For example, an investment linked to borrowing (lifetime mortgage or equity release type arrangements).

Records relating to suitability in respect of a life policy, a personal pension or a stakeholder plan where a client proceeds with the recommendation must be retained for a minimum of 5 years. Records relating to pension transfers, conversions and opt-outs still have indefinite retention. Records relating to suitability where a client does not proceed with the recommendation do not need to be retained but we would recommend that they are kept as long as they might be of value. 

Periodic assessment of suitability

This is a new requirement and firms will need to give serious consideration to how their ongoing service propositions operate. Periodic assessment of suitability is detailed in COBS 9A.

“Firms providing investment advice must agree with a client whether a periodic assessment of suitability will be performed. If periodic assessment is to be performed it must be at least annually and the continued suitability confirmed in writing.”

Most firms currently agree with the client whether ongoing reviews are required or not. Where ongoing service is to be provided, it is usually at least annually. So far so good, no fundamental changes of practice required by most if not all firms.

However, while we believe firms probably provide written confirmation of any changes to be made to the client’s portfolio, it is less certain that there would always be written confirmation of the suitability of existing investments each time, if otherwise no changes or new investments are being made. So, firms should note that there will need to be explicit confirmation of the suitability of existing investments each time a review is done and that such reviews must be at least annual.

The periodic report, must contain an updated statement of how the existing investments meet the preferences, objectives and other characteristics of the client. But such confirmation of continued suitability does not need to be War and Peace – a reference back to original report and brief confirmation is all that is required. The rules state –

“Where an investment firm provides a service that involves periodic suitability assessments and reports, the subsequent reports after the initial service is established may only cover changes in the services or instruments involved and/or the circumstances of the client and may not need to repeat all the details of the first report.”